Getting used to slow growth
Following our last Global Outlook (GO) in November, developments took a turn for the worse: a poorly received ECB decision in December, repeated downward surprises in US data, more negative news out of large EM economies such as Brazil, and, importantly, weak data out of China coupled with large capital outflows that led to further CNY depreciation.
Oil prices also took a further dive amid news about additional supply from Iran and conflict within OPEC, while the dollar rallied in parallel in this ‘risk-off’ environment. Some disappointing euro area data followed and the surprise decision by the BoJ to cut its policy rate into negative territory further spooked global financial markets.
The deterioration in the economic data – notable but not catastrophic – did not on its own necessarily justify the very sharp valuation changes across markets. Liquidity issues can probably explain some of the response, but what was striking was how rapidly markets were willing to adopt extremely pessimistic narratives around any developments, including, for example, the effects of falling oil prices and their ability drive the US into recession.
Further policy easing and some improvements in the economic data have assuaged market fears since, supporting a firmer oil price, a softer USD and a related rebound in risky assets. Will this turnaround last?
We note that, while not identical, this recent episode played out similarly to the one last summer, suggesting that without a fundamental change in the global economic environment – which we do not predict – the current episode is again likely to give way to one of higher volatility and spreading angst.
Hence, we may continue to see a pattern where financial markets swing erratically around a path of economic data that may look very mediocre from a historical perspective but actually reflects a new normal of slower growing world.
Hope for a better Q2, but global growth remains slow
Although economies may be less fragile than the market earlier in the year seemed to suggest, global growth remains sluggish overall, with few signs of a notable change. After some further downward revisions in our growth forecasts since the last GO in November, we now expect the global economy to expand by just 3.1% this year, roughly the same rate as in 2015.
The downward revisions were relatively modest but widespread, implying slower growth rates in the US, Europe and Japan as well as for Brazil and Russia, where the recessions have been even worse than expected. We revised up slightly our below-consensus forecast for China, while lowering our still very constructive growth outlook for India.
The quarterly pattern of global growth does suggest some improvement in Q2 over Q1. This would mainly come from EM economies, as we expect China to accelerate from a weak Q1 on the back of policy stimulus. A predicted pickup of activity in India and the easing of Brazil’s recession also help. However, with some legitimate concerns about the sustainability of China’s re-acceleration (more below) and with Brazil still marred by political turmoil, it seems premature to declare this an inflection point in the EM growth outlook, in our view. Similarly, growth risks around the US and Europe seem balanced at best, leaving us cautious on the outlook for global growth.
The narrative around the global growth story remains broadly unchanged. Growth is supported by consumption in the US and in Europe on the back of recovering labour markets, low oil prices, very accommodative monetary policy and modest fiscal loosening in some areas (Europe, China). Even in a slowing China, consumption has outpaced other GDP expenditure categories.
This relative resilience in global consumption contrasts with still lacklustre investment and very weak global trade – both reflected in an ongoing manufacturing recession. The latter varies across regions, with surveys pointing to manufacturing activity still sharply contracting in China, recently stabilizing (in negative territory) in the US, and slowing (but still expanding) in Europe.
On an aggregate global level, however, there are still few signals of a meaningful turn-around in manufacturing or industrial production overall. This mediocre global growth performance may seem disappointing against the backdrop of the massive oil price decline since mid-2014, which should have been expansionary in aggregate. In principle, the ‘oil dividend’ does exist and has led to higher consumption in oil importing economies.
However, this effect has been largely offset by the secular investment decline in China, which in turn weighed on growth throughout EM, and the aggressive investment cuts in the energy sector, following the previous period of heavy investment (including in the US).